How to Spend It, and the economics of the useless

The industrial economics of extreme wealth is an interesting subject. It’s often been observed that a lot of the spending of the rich goes into positional goods. A positional good is, in a sense, in fixed supply, or rather, position itself is in fixed supply. If more of a positional good is produced, its positional value decreases. More spending on them can only inflate their prices.

The quintessential positional good is land. A lot of land is useful in itself, but it is true everywhere that owning x amount of land gives you more positional utility than an equivalent position in cash or securities, and the most sought-after land by area isn’t farmland or building plots near a container terminal or an oil well, it’s billionaires’ row, whose value is entirely positional. Land is the classic case of economic rent, and that’s what I’m driving at.

Just as rent doesn’t reflect costs of production, but only a monopoly position, the price of positional goods reflects only their positional nature and the income of those competing for them. Let’s now switch to the economics of the firm; if the price of X is dominated by economic rent, an increase in the price is mostly an increase in profit. If profits rise in some sector, capital should be preferentially allocated to it.

Clearly, you can’t manufacture Hampstead or Palo Alto or the Prinzregentenstrasse, or only with great difficulty and the risk of destroying its positional quality. You can easily manufacture more iPhones, which therefore are gradually becoming less positional. You can manufacture Vertu phones by sticking diamonds on mid-2000s down-ticket Nokias, essentially creating purely positional items. Joseph Schumpeter would of course point out that it is the aim of all enterpreneurship to be able to claim the economic rents of monopoly.

In order for capital to be reallocated to the positional sector, then, it’s necessary to invent new forms of positional competition, and ideally, ones which escape from the temptation to just be a good product that can be produced on a big scale like iPhones or VW Golfs or my trainers. And indeed, we see a sizeable economy devoted to just that. One way of achieving this is to dematerialise the product – Cory Doctorow once remarked that if they can’t define your job they can’t outsource it, and the greater the immaterial content, the more of it is concentrated in the mind of its creator and the place and time of its consumption. Therefore, it is harder to replicate. In that sense, it’s a form of economic growth that is light on resources, but it seems intuitively difficult to defend activity that is pointless, other-regarding, private, and directed to snobbery.

Another way is to increase the service content of the product. We noted that land confers more status than most goods. But servants are almost as good or better, and would you bet against slaves being better still? This is very interesting indeed, as it may well represent a deliberate reduction of productivity and therefore a net loss to society. Where wealth is used to display power over others, by deliberately wasting labour, perhaps we’re seeing something like the costly-signalling logic of the peacock’s tail, or a form of bourgeois potlatch.

There are of course other options. In so far as positional spending is directed at public beauty, it is perhaps worth having – having your name prominently displayed as a benefactor of the Royal Academy, much as I find the place annoying and reactionary, is better than spending your money like Dennis Kozlowski on that giant ice sculpture of Michelangelo’s David, pissing vodka into your guests’ glasses. (Although to be honest, if anyone’s up for reconstructing the thing as an installation somewhere public, even I’d contribute to your Kozlowski Memorial Fund. Yes, I know he’s not dead yet.) And some bits of the positional industry have complex business models that rely on everyone else as much as they do on the super-rich – fashion couldn’t support its baroque R&D-and-advertising-and-French-heritage-project top end without the high-street and wouldn’t have any ideas without the low-street.

But then, if there’s a good reason to unlearn economics in the first place it’s to respect institutions and complexity and the notion that people’s motives ought to be taken seriously, not only when they are convenient.

About Alex Harrowell

Alex Harrowell is a 33-year old research analyst for a start-up telecoms consulting firm. He's from Yorkshire, now an economic migrant in London. His specialist subjects are military history, Germany, the telecommunications industry, and networks of all kinds. He would like to point out that it's nothing personal. Writes the Yorkshire Ranter.

10 thoughts on “How to Spend It, and the economics of the useless”

Interesting article – one small (but, at least I think, interesting) point. iPhones aren’t really positional goods – A while ago the Economist, I think it was, made a nice distinction between luxury goods and premium goods. Gucci handbags, rolexes and vertu phones are the former, iphones and Audis are the latter (you essentially can’t really construt a functional counterfeit of an iPhone or an Audi). iPhones are a particularly interesting case, because they can actually only exist on the basis of a large base of consumers. Smaller, maybe than the entire phone market, but necessarily large, since they have truely huge fixed costs (the software), and relatively small, but – importantly – still significant marginal costs (hardware components and manufacture). You could have the only instance of a Gucci handbag in the world, or the only vertu phone, or a cheap rolex lookalike with a quartz moment inside, but the only iPhone in the world would _literally_ cost a billion dollars (the cost of the software), and not be worth having (since you would not have access to the network externalities).

Confucius advocated a “rectification of names.” Maybe it’s time for a rectification of status symbols. This might be brought about by a graduated expenditure tax for example, which in effect would be a progressive luxury tax. Positional goods would still exist, but scaled down in size. The billionaire with a private jet could say, in effect, “Yea, but I bought eight more just like it for the general public. Had to give up three of my five mansions.”

Incidentally, both of these have social control as the outcome (I’d also add to this list “leader of one of the main three UK political parties” which these days seems to be more a status symbol than anything else).

What about utility privatization as a form of government-granted positional good?

We could divide up the positional goods into two types – those that grant power/control, and those that are “superficial” (like the ice sculpture).

Interesting whether the honours system is the later or the former. It seems at first blush to be superficial, but then I remember how often “Lord” Digby Jones gets wheeled out as the voice of the business class.

Good point about productivity. Add in here about hierarchical organisations more generally (and also executive compensation) – and also there’s the analogy of “wage slavery” with chattel slavery. A good leftist critique of capitalism emphasizes local, democratic decision-making. Not only for moral reasons, but also because if decisions are made by those with intimate knowledge of production (or by those directly affected), then better decisions may be more likely to be made.

Sean: I was trying to get at that distinction. The idea of counterfeiting being a valid criterion is interesting. If you did put together a counterfeit iPhone – a Chinese ODM could buy some top of the range parts, from Samsung and Qualcomm and CSR and Infineon and Toshiba, build the device, and install the latest version of Android skinned to look like iOS – you wouldn’t be counterfeiting so much as competing.

Obviously, Apple’s lawyers wouldn’t see it that way. But unlike counterfeit jewellery, your product wouldn’t be worthless if detected. It would be a high-end smartphone with a slightly lower list price. Some people might even think it rather cool.

ADA: yes, spending money on politics is a pretty clear case of positional spending. It always surprises me how small the sums in party financing scandals are – evidence that political parties are quite cheap, and much of the cost of a US presidential campaign may be positional inflation.

“But servants are almost as good or better, and would you bet against slaves being better still? This is very interesting indeed, as it may well represent a deliberate reduction of productivity and therefore a net loss to society.”
And speaking of Confucious, can we expect Chinese billionaires to start demanding wives with bound feet?
Or in the States, since corporations are now people, perhaps aristocratic titles?

It makes you wonder about that definition of economics to do with allocating scarce goods. Given that abundant land ha in the past resulted in slavery, would one of Knight’s “Gismos” or a shmoo lead to slavery or be destroyed if they could exist? The original Luddites weren’t against new technology per se – just worried about their jobs. Today we have the likes of Hollywood attacking the digital revolution by championing tough measures against piracy (the closest thing we have to a shmoo/Gismo is the internet so far). Add in Cohen’s argument about an “artificial scarcity”, as well as the fact that in times of huge scarcity, command economies end up being imposed, and you have a lot to think about about what’s considered acceptable in neoclassical economics.